Colo­nial Pipe­line plan to cut off dirty jet fuel could hit air­lines

Kuwait Times - - BUSINESS -

Ma­jor air­lines in­clud­ing Delta, United and Amer­i­can could face higher fuel costs if US reg­u­la­tors al­low Colo­nial Pipe­line Co to stop ship­ping a dirt­ier blend of jet fuel by 2018. The Colo­nial sys­tem car­ries most of the jet fuel that is de­liv­ered via pipe­line to the East Coast and used by busy air­ports serv­ing New York, Wash­ing­ton, DC and At­lanta, along with US mil­i­tary bases. The pipe­line com­pany said ear­lier this month it would ask the Fed­eral En­ergy Reg­u­la­tory Com­mis­sion for per­mis­sion to halt ship­ments of high-sul­fur jet fuel and diesel.

Pre­lim­i­nary es­ti­mates in­di­cate that jet fuel prices could rise sig­nif­i­cantly if Colo­nial wins ap­proval, said John Heim­lich, chief econ­o­mist for the in­dus­try trade group Air­lines for Amer­ica (A4A). Ris­ing fuel prices could make cer­tain flights un­prof­itable, forc­ing air­lines to cut ser­vice and sell fewer seats - likely at higher prices. It would take jet fuel price in­creases of 30 to 50 cents per gal­lon to have a big im­pact on pric­ing or flight avail­abil­ity, said Robert Mann, an in­dus­try con­sul­tant and for­mer ex­ec­u­tive at Amer­i­can and other air­lines. Jet fuel in the New York Har­bor traded at about $1.44 per gal­lon as of Tues­day.

A Colo­nial spokes­woman said the pipe­line com­pany was dis­cussing its reg­u­la­tory pro­posal with af­fected air­lines but de­clined fur­ther com­ment to Reuters. The move would al­low Colo­nial, which daily ships more than 3 mil­lion bar­rels of pe­tro­leum prod­ucts, to more ef­fi­ciently move more low-sul­fur prod­ucts through its pipe­line. Cut­ting down on dirt­ier fu­els would re­duce so-called “trans­mix,” which oc­curs when high-sul­fur and low­sul­fur prod­ucts are com­bined. The re­sult­ing mix­ture has to be re­fined or blended again.

Colo­nial has not spec­i­fied what it in­tends to ship in place of high-sul­fur fu­els. But the pipe­line has been full for about four years, and Colo­nial would likely see strong de­mand for any open space. The com­pany shut its gaso­line pipe­line for the se­cond time in less than two months on Mon­day after an ex­plo­sion in Alabama killed one worker and in­jured five oth­ers. It briefly shut the dis­til­lates line as well, which trans­ports jet fuel.

Amer­i­can Air­lines Group Inc, United Con­ti­nen­tal Hold­ings Inc and JetBlue Air­ways Corp de­clined to com­ment on Colo­nial’s reg­u­la­tory pro­posal, re­fer­ring ques­tions to A4A. A spokes­woman for South­west Air­lines Co de­clined to com­ment, say­ing the air­line is still eval­u­at­ing the plan. Delta Air Lines Inc may be more in­su­lated from fuel price shocks than oth­ers be­cause the com­pany op­er­ates a re­fin­ery in the north­east U.S. that is heav­ily geared to­ward jet fuel pro­duc­tion. Delta did not re­spond to re­quests for com­ment.

Shift­ing reg­u­la­tions, de­mand

Colo­nial’s plan is driven largely by wan­ing de­mand for high-sul­fur fu­els. Rail­road and marine trans­porta­tion com­pa­nies, for in­stance, are us­ing less high-sul­fur diesel fuel in re­sponse to en­vi­ron­men­tal reg­u­la­tions. Sul­fur lev­els in jet fuel are not cur­rently reg­u­lated, how­ever, and the in­dus­try still uses high-sul­fur fu­els widely, in part be­cause they have bet­ter lu­bri­cat­ing qual­i­ties for air­plane en­gines.

Air­lines can and do use a range of cleaner fu­els, Heim­lich said, which Colo­nial would con­tinue to ship un­der its pro­posal. But air­lines are con­cerned that many re­fin­ers could take years to make up­grades re­quired to pro­duce jet fuel to Colo­nial’s pro­posed low-sul­fur stan­dard. Some re­fin­ers would need to in­vest in desul­fu­r­iza­tion units known as hy­drotreaters, said David Hack­ett, pres­i­dent of the en­ergy con­sul­tancy Still­wa­ter As­so­ciates. Or they could up­date their fa­cil­i­ties to process sweet crude in­stead of high­sul­fur sour crude. Ei­ther way, re­fin­ery costs would go up, and the tran­si­tion would take time, rais­ing the prospect of air­line fuel short­ages. “Three years is min­i­mum,” Hack­ett said.

Po­lit­i­cal, lo­gis­ti­cal chal­lenges

Colo­nial needs per­mis­sion from the en­ergy com­mis­sion to stop ship­ments of high-sul­fur fuel, and the air­lines can ex­ert in­flu­ence on that process. A com­mis­sion spokes­woman de­clined to com­ment, not­ing that Colo­nial’s pro­posal has not been for­mally filed with the agency. At stake is a large por­tion of the about 400,000 bar­rels per day (bpd) of jet fuel that moves from the US Gulf to the East Coast via pipe­line, ac­cord­ing to US En­ergy Depart­ment data. About two-thirds of East Coast jet fuel de­mand is cur­rently met by pipe­line flows from the Gulf Coast, ac­cord­ing to an­a­lysts at En­ergy As­pects.

If Colo­nial wins ap­proval, air­ports in the south­east­ern US may turn to Kinder Mor­gan’s 700,000 bar­rel-per-day Plan­ta­tion Pipe­line, which has less than a third of Colo­nial’s ca­pac­ity. Kinder Mor­gan, in a state­ment, said it is “eval­u­at­ing the chang­ing mar­ket con­di­tions” be­fore con­sid­er­ing any ex­pan­sion of ship­ping high-sul­fur jet fuel. If Plan­ta­tion and other in­ter­state pipe­lines fol­lowed Colo­nial’s lead, it could make sup­ply­ing air­ports even more chal­leng­ing. Truck­ing fuel to ma­jor air­ports is not fea­si­ble due to the sheer vol­ume of fuel needed. Water­borne ship­ments could be ex­pen­sive, in part due to the Jones Act, a mar­itime pol­icy which re­quires goods trans­ported by wa­ter be­tween US ports to be car­ried on US-flagged ships. That may make it cheaper to im­port jet fuel, par­tic­u­larly from Europe. — Reuters

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